Markets jittery ahead of RBI's policy decision; Sensex falls 568 points

India’s benchmark indices declined about 1 per cent ahead of the RBI’s policy decision, as investors assessed the outcome of rising interest rates and tightening liquidity.

The Sensex fell 568 points and ended the session at 55,107, down 1.02 per cent — a third consecutive day of fall for the index. On the other hand, the Nifty ended the session at 16,416.35, a drop of 153 points, or 0.9 per cent, amid weak global cues.

Foreign portfolio investors (FPIs) sold shares worth Rs 2,294 crore, while domestic investors provided buying support to the tune of Rs 1,311 crore.

Investors were nervous ahead of the Reserve Bank of India (RBI)’s monetary policy committee’s (MPC’s) rates decision on Wednesday. The central bank is expected to raise the policy rate further. Analysts said the quantum of the hike and the RBI’s commentary on inflation needed to be watched.

Rising crude prices also weighed on sentiments. The Brent crude was trading at $120 per barrel intraday on Tuesday.
 

Investors are worried about the economic impact of rate hikes by central banks across the globe. Investor fears were reflected in the rising bond yields with the 10-year Indian bond yield hitting a three-year high at 7.5 per cent.

The 10-year US bond yield stood at 3.02 per cent, closer to the highs it hit on June 5, 2022.

“The move higher in US yields could well be in anticipation of the $96 billion of US government bond sales hitting markets this week in the 3-, 10- and 30-year tenors,” said Jeffrey Halley, senior market analyst, Asia Pacific, OANDA.

Market experts said investors were hesitant to take bets on risky assets as heightened volatility diminished the chances of markets holding onto gains. The tapering of monetary stimulus and geopolitical tensions have led to questions about how these measures could hurt economic activity and corporate earnings.

The European Central Bank (ECB) is also likely to end its monetary easing and develop a plan to end its negative interest rate regime that has been in place for the last eight years. ECB officials had hinted at rate hikes after Eurozone inflation hit a record high in May. At present, ECB’s deposit rate is at 0.5 per cent.

On Tuesday, Australia’s central bank announced a  rate hike and signalled more hikes to rein in inflation.

Going forward, apart from the RBI’s announcement, US inflation data on Friday is expected to guide the market trajectory this week.

“An 8.5 per cent plus US inflation print could see it start to price in a recession and head to inversion in parts, as the data reinforce Fed tightening. In a stagflationary environment, central banks don’t have a good choice, just the least bad ones. I don’t think the US is at stagflation yet, but if oil stays above $120 a barrel, it might soon be,” said Halley.

Vinod Nair, head of research, Geojit Financial Services, said the volatility in the market was forcing investors to stay on the sidelines ahead of the RBI’s policy announcement.

“The market has factored a hike up to 50 bps of repo rate and CRR, but any further stricter measures to clamp liquidity due to lingering inflation will impact the market trend. Apart from the monetary measures, the RBI’s growth and inflation forecast guidance will determine the market trend,” he said.

The market breadth was weak, with 2,052 stocks declining and 1,250 advancing.